LAW303: The Australian Tax and Transfer System - Taxation Law Assessment Answers

August 22, 2017
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Question: Taxation Law Assignment

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You are required to write a research essay addressing all of following points:

“Australia has too many taxes and too many complicated ways of delivering multiple policy objectives through the tax and transfer systems. The capacity of the legislative and operating platforms of these systems, and their human users, to deal with the resulting complexity has been overreached. The tax and transfer architecture is overburdened and beginning to fail in dealing efficiently and effectively with multiplying policy goals and demands. Rationalisation of the tax and transfer architecture should now be a strategic priority.”

Discuss. What are some of these multiple policy objects the Australian tax and transfer system tries to achieve? How does the system overreach and is hence overburdened currently? How do you propose to rationalise the tax and transfer system of Australia to overcome these shortcomings?

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Solution: The Australian tax and transfer system

Introduction

The Australian tax and transfer system is a complex mechanism in which the government collects its revenue through tax and makes disbursements to the citizens in several transactions. The tax transactions are mainly the major means in which the government generates its revenue adequate to cater for the roles and responsibilities it has towards the people. The tax-transfer system thus describes the combination of the tax mechanisms as well as the transfer transactions and how the two interrelate to realize an economic stability in Australia (Oliver, 2014). The two systems are based on the demands of the country as a whole and the expectations of the nationalities from the leadership. The system further relies on the data relating to income restructuring that should follow and the equilibrium between private and public delivery of necessities in terms of products and services. However, the system is arguably complex in nature leading to inefficiency that has proved expensive to the people. This essay examines the complex nature of the system and the objectives it seeks to achieve through its several policy projects. it has analyzed the challenges the system is experiencing and has outlined some of the recommendations that can be adopted, deployed and implemented to make the system effective and efficient.

Overview of the Tax System

  • The Australian tax system is a complex one divided into two sections: taxes and Transfers. Below is a brief overview of the two

Taxes

  • Australians pay more than 125 taxes annually. Of the many taxes, 99 of them are taken by the national government, 25 by the State authorities and the remaining ones by the local government. The government gets over 90% of its revenue from 10 taxes (Oliver, 2014). These major taxes normally account for between 70% and 95% of the entire government tax revenue (Oliver, 2014). The remaining taxes only contribute to a partial percentage of the revenue generated. The taxes are levied on numerous transaction that the citizens and other people living in the country make on annually. Though the taxes are levied on similar transactions, there lacks consistency in various jurisdiction on the rates and forms of taxes levied. In the financial year 2006-07 for instance, the revenue generated was $262.5billion principally through income tax, GST, fuel tax, beer and cigarettes as well as custom tariffs (Oliver, 2014). During the same period, the States garnered $48.9billion via their prescribed taxable transactions. These include tax on assets, automobiles, gambling and insurance deals.

Transfers

There are more than 40 cash transfers given to the citizens by the national government in the country. These account for about 25 percent of the entire national budget. The major forms of transfers include income support cash outs and money paid to families such as pension, Newstat, grants, domestic Tax Subsidy and supplementary disbursements (Kerr, 2015).

Policy Objects the tax system wants to achieve

The tax system funds government operations

The main objective of the tax system is to ensure that all government operations run as expected. This is the main goal of the entire system. All various forms of taxes included in the systems are geared towards ensuring that government budget is financed. The problem is the manner in which this objective is achieved (Oliver, 2014). The need to fund government projects should not affect other aspects such as incentives and saving options.

Public Finance

The strong public finances that Australia enjoys is attributed to the tax and transfer system. The systems many alternatives thus work to ensure that the nation remain healthy economically to enhance the living standards of the people.

Equity

The systems are also targeted at realizing equitable distribution of wealth. This is achieved mainly through the various forms of transfers. This would not be possible if the government did not ensure compliance to its many tax forms and levels (Simkovic, 2015). The government is thus keen to ensure a fair society by having the required resources to achieve that target.

Relatively low comprehensive tax levies

Though the systems have inconsistences in the rates of taxes levied from some groups of people and unfair taxing policies such as those on bank savings, the average tax rate and amounts is relatively low compared to other nations (. The nation is classified as a medium-sized economy and depends heavily on extraneous investments. The tax amounts levied are thus relatively low.

Economic balance

The tax and transfer mechanisms in the country are designed to act as economic stabilizers in case of an economic imbalance. In cases of slow or retrogressive economic growth, the system has mechanisms to save the people by considerably reducing the tax rates (Business council of Australia 2014).

Challenges in the Australian tax and transfer system

The system is too complex

The major challenge of the system is that is too complex with numerous taxes but only about 10 of them raise over 90 percent of the revenue. The policy makers should restructure the system and possibly merge some tax options or scrap then entirely to make it easier to enforce compliance. Currently ensuring tax compliance is a difficult and expensive process.

The tax on savings is unreasonable and discourages Savings

The tax system should promote a saving culture because this enhances the living standards o of the people. On the contrary the tax system taxes some of the savings especially savings on bank accounts. This discourages people from saving on bank accounts an instead opt for the superannuation which is not taxed. This affects individual saving methods and choice and is detrimental to the economy. An effective tax system should not tax savings (Business council of Australia 2014).

Volatility

The systems heavily rely on unstable tax options like the stamp duty and corporate income tax. These are not reliable tax options and in most of the time lead to the territory and State authorities seeking financial assistance from the national government. The policy makers should restructure the system to ensure that it targets non-volatile options (Avi-Yonah et al., 2002). This is because in case of depreciations in housing markets and product pricing, the financing of the intended budget is at a risk. Still on overreliance, the collection of revenue hugely depends on income tax and sales tax which generate 50 percent and 30 percent respectively of the entire revenue. This highly affects the rate of economic development of the nation.

Erosion of tax Options

The tax options in the systems are slowly fading with time.an example is when the government raised the consumption of commodities excused from the GST. The country now has over 300 tax expenses without corresponding tax generating options (Keen, 2014). All taxes and transfer transaction influence the behavioral traits of the people. It affects the populations spending power and the incentive they are likely to realize. The operations of the tax-transfer system further affect the distribution of resources and opportunities either among various social groups or among generations. The general rate of tax levies, national government spending and the nature of the stipulated transfers normally affects distribution of wealth to the populace.

Fiscal imbalance in the nation

The system operations lead to significant disparity in the nation, which leads to lack of accountability and inefficiency of the leadership. The amount of revenue collected by the states leadership is not proportional to their expenditure (Keen, 2014). These economic policies further affect the long-term growth of some sectors such as the property market.

Recommendations to rationalize the tax and transfer system of Australia

The tax systems generate the revenue required to run all the country’s objectives. An effective system should raise such revenue without overburdening the taxpayers in the manner the current system is doing. A system should be simple and fair to everyone. To polish the systems the following measures should be adopted and implemented.

Lower the economic costs of revenue generating

Australia relies heavily on income tax and the money taxed from the companies compared to other nations in the same level. State and territory authorities depend substantially on taxes that entail high economic expenses such as the stamp duties (Business council of Australia 2014). Treasury reports indicate that every extra dollar garnered from company tax lessens the living standards of the populace by about 50 cents in the long-run. This is mainly attributed to a decline in investments. This derails the nation’s productivity and eventually minimizes opportunities for landing well-paying jobs. The government should thus consider possible alternatives of collecting these forms of levies or scrap them entirely from the system.

Simplify the tax system

The tax system presents reasonable opportunities to simplify it from its current complex status. The systems necessitate significant expenditure on tax compliance and tax control strategies which can be reduced by simplifying it (Business council of Australia 2014). There are several reasons that make the system complex. One of the reasons is having several forms of taxes targeting specific groups. Another cause for the complexity is amending the taxation law to solve trivial problems or ensuring tax compliance for everyone without considering the significances of the strategies to the entire system. Excessively risk-averse perceptions on the leadership as well as the administrator coupled by complex legislative measures aimed at the design of the system have complicated its operations with time. The policy makers thus need to review the level and measures in which they enforce tax compliance to ensure that the measures are not detrimental to the efficiency of the system.

A chance to reform

  • The most significant aspect of the tax and transfer systems in the country is that they have options for improvement to minimize the challenges presented by the mechanisms of their operations (ATO 2014). The nation has a powerful fiscal policy and experiences resources boom from time to time. These two aspects can aid in transformation of the entire system. An effective tax system should promote incentives and rewards initiatives. Stability of the nation economically can allow for readjustments of the system to lessen the challenges associated with its status.

Improve the fairness of the tax system

Though the system is relatively fair, there are opportunities in the economic system in which the fairness can be enhanced. The tax and transfer systems have been progressive over the years, which imply that they should realize fair outcomes. However, the connections between the tax system and the transfer system demotivate some employees to engage in taxable activities (Oliver, 2014). The comparatively high level marginal tax rate and the difference between the maximum marginal tax rate and company tax rate figures in tax scheduling can be averted.

The policy makers should address all the issues mentioned and restructure the entire tax and transfer systems to ensure efficiency and effectiveness in achieving the intended objectives. Since that nation has a strong fiscal background and is endowed with resources, the leadership should capitalize on the two to improve the tax system

Conclusion

This paper has analyzed the characteristics of the Australian tax and transfer systems by giving an overview of the system including its objectives. It has outlined some of the challenges facing the system and some of the remedies that can be implemented to make it more effective. An efficient tax system should generate the required revenue necessary to run all the government operations without unnecessarily overburdening the taxpayers by including avoidable costs. The system thus requires the suggested remedies to improve its functionality. Though the overall tax paid is relatively smaller compared to that of other developed nations, the system can be polished further considering that Australia has very rich economic opportunities. The national leadership generates almost 80 percent of the overall tax revenue but again disbands almost 50 percent of the same to state leadership in form of transfers. The GST falls under this category. Though the nation has had huge economic developments in the recent decades, the benefits from income tax have remained stagnant since the 50s. Company tax and stamp duties are particularly too expensive to the economic growth and should thus be evaluated. The system should be simplified to ensure that it is consistent for all the people and benefits every citizen equally. However, the systems record developments every financial year and are thus among the best globally.

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